As this unprecedented year nears its end, many business owners are wondering what may be in store for the New Year. If 2020 has taught us anything, it’s that we need to expect the unexpected. Some of those “unexpecteds” are beyond our control, but avoiding the “F” word is not. Do not let FRAUD ruin 2021!

Due to the pandemic, many people, including your employees, are facing hardships. They are anxious and uncertain about their future and financial security; perhaps even feeling desperate to fix their situation. As the old adage goes, “desperate times call for desperate measures.” Do not let those measures include fraudulent activities in your company.

It’s my belief that people are inherently good and will only commit fraud when they feel there is a need (motivation), justifiable reason (rationalization), and means (opportunity). Motivation, rationalization, and opportunity each represent one leg of the Fraud Triangle. When an employee has all three, fraud can and will occur.

As a business owner, you have more control in regards to rationalization and opportunity than you do motivation, but understanding how to recognize where there is potential for fraud will go a long way in minimizing your risk.

MOTIVATION
Most employers know little about their employees outside of the job, so you may not even be aware of the influencers pushing an employee to steal from your company. Substance abuse, gambling addiction, marital issues, financial difficulties, and mounting medical bills are all noted motivational drivers for workplace fraud. As a business owner, you need to have leadership and processes in place to help recognize issues before they get out of control. One tip is to ensure your employees are paid fairly for their work. This alone can have a huge impact on motivation.

RATIONALIZATION
Again, because I believe people are inherently good, motivation alone does not necessarily mean an employee will commit fraud; however, that changes when the employee starts to rationalize why it is okay to steal from the company. Employees take cues on acceptable culture and office behavior from those in leadership positions. If you or your management team is perceived as dishonest, shady, or disingenuous, employees may rationalize that committing fraud is okay because you “deserve” it. The best method for deterring rationalization is to always do the right by your employees and customers. Set a good example and be transparent.

OPPORTUNITY
You can only do so much to deter an employee’s motivation and rationalization for committing fraud; however, the leg of the Fraud Triangle for which you have complete control is opportunity. If you remove opportunity, you can prevent nearly all occurrences of fraud. Small businesses that have one or two employees that handle accounting and finances, with segregated duties and internal controls, have an increased risk of fraud. The following are steps all businesses can take to reduce and prevent incidents of fraud in the workplace:

• Set expectations for employees and lead by example
• Establish and maintain a written Fraud Policy and Fraud Investigation Committee
• Create a fraud hotline
• Perform background checks and review licensing requirements for all employees
• Have bank statements mailed/emailed to the owner’s personal address
• Carefully review bank, utility, and credit card statements
• Ensure all requests for payment are presented to the signer with supporting documentation
• NEVER sign a blank check
• Maintain accurate and timely financial statements
• ASK QUESTIONS about everything, especially anything deemed suspicious
• Conduct SURPRISE inspections and observations
• Limit or ELIMINATE debit and credit card usage by employees
• Institute MANDATORY vacations for all employees
• Divide accounting duties and instill internal controls
• Conduct routine reviews of the Quick Books audit trail report
• Establish inventory controls
• Document and TAKE APPROPRIATE ACTION against perpetrators of fraud, including termination and prosecution

Many of the tips above relate to establishing a company culture that does not tolerate fraud. A written fraud policy, fraud investigation team, and termination or prosecution of employees involved in fraud are important steps in creating zero tolerance. It is also important to remember that fraud isn’t just the theft of cash or checks. It is the unauthorized diversion of any company resources for one’s personal gain.

Fraud in the form of employee time is prevalent in many businesses. This fraud occurs when an employee is dishonest about the hours worked, or is being paid by you while working for someone else. Taking or using small tools and office supplies, as well as company resources, such as phones and computers, for unauthorized personal use are also examples of fraud. Offering unauthorized discounts or trades of services, setting up side jobs for company clients, and participating in brides are all common types of fraud. Another susceptible area is bonuses. Beware of employees’ attempts to exaggerate or lie about results in order to earn a larger bonus.

ANATOMY OF A FRAUDSTER
It may surprise you to know that those most likely to commit fraud in the workplace are long-term employees and family members. You may give them less scrutiny, believing they have your best interests at heart. The reason long-term employees and family member are so successful at committing frauds is because they are trusted and have intimate knowledge of where the business is most vulnerable. They many feel confident that they would not be suspected of fraud because of their tenure or relationship. There is also the rationalization that because they are a relative, or have made significant contributions to the company’s success, they are entitled to certain discrepancies. Be sure you hold long-term employees and family members to the same standards, expectations, and policies set for all other employees.

CONCLUSION
Fraud in the workplace is responsible for significant losses to businesses each year. Small businesses are especially at risk. Implementing simple processes and making small changes can have a huge impact on reducing and preventing incidents of fraud in your workplace. Set the example and let your entire organization know that fraud will not be tolerated. Ask questions and more questions until the answers make sense. Don’t let fraud ruin your new year.

About the Author

Ross Dietrich, CPA

Managing Partner

[email protected]

(602) 776-6344